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Deepening EMU: Commission makes limited steps (mostly) forward

Today the EU Commission launched a long-awaited set of concrete proposals to deepen European Monetary Union (EMU). The proposals are voluminous and in some areas detailed. Here’s a summary of the most important points and a first evaluation.

First, the European Stability Mechanism, currently intergovernmental, is to be transformed into a European Monetary Fund as a fully-fledged EU institution. Beyond the legal change – which is surely welcome, the intergovernmental solution having been chosen under the pressure of imminent crisis – the Commission envisages few functional changes. The main task of crisis-lending to Member States in need and the related ability to issue bonds to raise finance remain. New is that the EMF is to back-stop the Single Resolution Fund as part of the Banking Union. By providing guarantees or a credit line, and in parallel by reducing the policy areas subject to unanimity, the EMF will be able to offer swift assistance in the case of banking crises, plugging a notable hole in the policy framework. By underpinning confidence in financial stability, this should reduce the likelihood of its having to be used.

Reference is made to the possibility for the EMF develop new financial instruments “over time”. This is a door left open to a future extension of borrowing – and thus stabilization – capacity in the future.

Equally important, unlike in the vision of now-departed German finance minister Wolfgang Schäuble, the EMF is not foreseen to play a key role in disciplining member states and ensuring the implementation of structural reforms. Oversight responsibility is to remain unchanged (i.e. divided between the Commission and the Council).

In a formally similar way, second, the intergovernmental Treaty on Stability, Coordination and Governance is to be integrated “in substance” – that means taking account of some flexibility subsequently agreed – into the EU treaties. This change had been foreseen in the TSCG itself, and fiscal provisions have already been anchored in national laws and even constitutions. To that extent there is no substantive change, but this also means that the negative aspects of the TSCG’s fiscal rules will not be called into question. In terms of process, it will enable the European Parliament to have a fuller supervisory role.

Thirdly, there is – while rejecting the setting up of a specific budget for the Euro Area – the Commission has proposed various budgetary instruments to support Euro Area countries within the existing EU budget. Some measures relate to financial incentives for and technical assistance in conducting structural reforms, including in countries preparing to join the euro; they are quantitatively very limited, though. More importantly there is finally a proposal for an area-wide stabilization function. This is restricted, however, to the sensible but limited goal of preventing countries in recession from having to cut public investment. It is therefore a very partial fix for the fundamental problem that the budgetary rules, in practice, are pro-cyclical, that is lead to belt-tightening in downturns while permitting fiscal expansion in good times, or at least limit the scope for counter-cyclical policy.

Fourthly, a proposal is made for a European Minister of Economy and Finance, with a recommendation that he or she be simultaneously Vice-president of the Commission and President of the Eurogroup. This step would have a number of advantages in terms of a clearer representation of the interest of the Euro Area as a whole, vis-a-vis that of (the current governments of) the Member States. It would as a consequence also go some way to reduce the intransparency about “backroom deals” in the intergovernmental Eurogroup. The Commission is, inevitably, rather coy about setting out the precise functions of the minister, emphasizing a role in overseeing the use of EU and euro area budgetary instruments. In the longer run the minister’s role will be conditioned by, among other things, decisions taken on the size and composition of the EU budget (i.e. within the framework of the post-2020 Multiannual Financial Framework).

Overall assessment

Deepening EMU is vital to make the common currency work for all member states. Overall the Commission proposals can be considered moves in mostly the right direction; the steps are fairly small, however. The Commission is, of course, aware of the current political landscape in European national capitals and the limited (and/or conflicting) desires for major institutional changes. The Commission’s initiative is notable not least for what it does not propose. The ESM is not foreseen to develop into an independent “enforcer” of structural reforms and there is no mention of enhancing “market discipline” on government finances (i.e. sovereign debt restructuring), both key elements of the “Maastricht 2.0” view propounded among others by Schäuble (see analyses here and here p. 98ff). Equally there are no ambitious proposals for automatic stabilization mechanisms (such as a partial Europeanisation of unemployment insurance) or large counter-cyclical buffers (not even rainy day funds never mind a Euro Area borrowing capacity). A door is left open for the latter, however, via future EMF financial instruments.

There is indeed a logic in avoiding a separate budget for the Euro (given that the €A19 will represent 85% of the GDP of the EU27, and only Denmark has an opt-out from ultimately joining). Still, it leaves the question open as to what within the overall EU budget will be cut to make room for an increase in spending on Euro Area concerns; or is the Commission banking on agreement for an increase? No attempt is made to improve the existing fiscal framework, despite general recognition that this is necessary. While there is talk of the importance of increasing “ownership” of commitments to a cooperative economic policy, no thought seems to have been given to ways to strengthen institutional capacity and buy-in of a more coordinated policy; see here (p. 118ff) for some ideas.

Still the proposals are overall broadly in the spirit of President Macron’s call for a great leap forward in economic governance; his Sorbonne speech was explicitly mentioned. In contrast there is little in there to please orthodox German opinion, and I expect German commentary will be overwhelmingly hostile, not least coming on the heels of the election of a – economically very well qualified – Portuguese socialist to the Presidency of the Eurogroup. It remains to be seen whether Germany, under its new government, assuming one is formed soon, will support the initiative in its entirety.

It is as usual – albeit contrary to popular myths on both Left and Right – the Member States and not the Commission that will ultimately determine to what extent proposals to deepen EMU see the light of day. Next opportunity is the European Council meeting on December 15th – if that is not swamped by frantic attempts to defuse the Brexit crisis.

It must be doubted whether the proposals, most of which are technical, will inspire public enthusiasm in the Euro to any great extent. The Commission rightly notes that public support remains strong and is strengthening further. Still there is widespread disenchantment in Italy with elections in the offing. The improvement in sentiment is on the back of an improving economic and labour market situation. It is important to safeguard that. I can at least agree with Commission President Juncker that it is time to fix the roof when the sun is shining.